“based on the data we have available to us, the balance of information suggests…”
Let’s review the data…
Gold hit a double bottom at 1240. It did not close below that on July 2 or December 12.
It did so at an extremely oversold RSI level of 21 on the daily chart, matching the low in November 2016 before a positively divergent higher RSI and lower price at 1124 on December 15, 2016.
The MACD Histogram was positively divergent, and the MACD Line was overextended to the downside, at its lowest level since coming out of the December 2016 low.
We also saw a fake breakout of its channel to the downside and reversal since, which is bullish.
Gold also broke its weekly trendline support dating back to the start of this new bull market in December 2015, but if it closes above 1258 tomorrow, this could also be considered a fake breakout to the downside which, again, is bullish.
That said, Gold was oversold on a weekly basis at 36 per its RSI, but this leaves room lower to 30 in the future and the risk of a lower but more sustainable low to come.
Resistance on the upside is at 1270, 1290, and the 200-day moving average currently at 1304.
Gold’s spot daily sentiment index hit 7 on Monday, extremely overbearish. It has only been lower on seven of the past 896 days since Jan 1, 2015. 4x in Q4 2016 and 3x in H2 2015. The most recent being when it hit a low of 4 on December 15, 2016, when it bottomed at 1124 and rallied 12%, or $141, to 1265 over the next two months.
It has since risen 13 points in two days to 20 yesterday and can rise further, but my only concern is that it may be rising too far, too fast.
The 21-day moving average DSI hit a low of 12.5 on Monday also. This has only been lower in two periods in the past four years:
- · 19 days from Dec 7, 2016 to Jan 4, 2017. Low of 9.7.
- · Five days from Aug 5 – Aug 11. Low of 12.
The question is, which period are we following? Gold rallied hard from the low in December 2016, but it hit a positively divergent lower low in price in December 2015 following the August 2015 period. The jury is still out on this one.
This information is somewhat dated ahead of the release of the COT report tomorrow, but as of Tuesday, June 26, we definitely had a sustainable bottom worthy condition in futures positioning.
Funds were basically neutral, short just 24 contracts, their most bullish position since Jan 5, 2016, when Gold rallied from a low of 1045 to 1377 in six months. But the Swaps/Banks remain short, although they did cut those shorts almost in half to 23k contracts. This does not negate the risk of a lower low in price after a short-term bounce.
More recent data such as the daily changes in open interest also raises some concerns about this bounce. Prior to the sell-off in Silver on June 15, we saw a spike in open interest as Funds raced to get long and Banks added shorts.
Although we are not seeing that in Silver currently, we are seeing a similar situation in Gold in the past few days. You can clearly see on the chart below what tends to happen to price each time open interest spikes.
Gold open interest rose 24k in just three days since hitting ~1240. Capitulation selling by Funds OR Funds loading up at the bottom? We won’t know until tomorrow, but if the former, extremely bullish. If the latter, then a lower low is still possible.
In summary, based on the data we have available to us, the balance of information suggests a strong rally ahead. Yet, unfortunately—and I know we’re all tired of hearing this—the risk of a positively divergent lower low remains also.
Switching gears to inter-market analysis, there are two other potentially significant drivers of Gold in the short term we must watch, the USD/CNY and GOLD/SDR exchange rates. No one said this was easy.
In my article last week entitled ‘Gold: The Chinese Connection’ (https://www.sprottmoney.com/Blog/gold-the-chinese-…), I stated that there is an escalating trade war going on between the U.S. and China, and China is responding to U.S. tariffs by devaluing the yuan. This has a direct impact on the price of Gold in dollar terms. It’s simple math. A higher USD/CNY drives down the price of Gold in dollar terms, as long as Gold in CNY terms remains stable ~8200-8360.
USD/CNY rose (the yuan was devalued) by 7.6% in just three months. Gold dropped from 1369 to 1240 around the same time. USD/CNY has peaked at ~6.70, the 61.8% retrace of the decline from 6.9650 to 6.2450, at the same time that Gold bottomed at ~1240.
The question is: has the USD/CNY peaked, or will the Chinese choose to devalue the CNY further in retaliation to U.S. tariffs? We don’t know, but Gold will likely head lower if they do.
Then there is the Gold/SDR exchange rate. Jim Rickards posted an article on Twitter this week where he posited that China is manipulating / pegging Gold to the SDR, but at too cheap an exchange rate that will require a revaluation of Gold when the next crisis hits.
He followed up with the following comment: “The broad range is SDR850 – SDR950 and the more recent narrow range is SDR875 – SDR925. That’s a 5.5% range with 2.75% above and below the target of SDR900; typical range for a soft currency peg.”
As you can see below, Gold/SDR was near the bottom of this range on July 2, and then both it and Gold bottomed and rallied the next day, Gold from ~1240 in dollar terms.
This is clearly something we need to keep an eye on. If Jim’s narrow range continues to hold, then the risk/reward clearly signals a move back up to the top of this range next, or the 1360s in dollar terms.
However, this does not negate the risk of spike lower to the bottom of the broader range at 850 SDR or ~1200 Gold in dollar terms.
In conclusion, all of the information we have at our disposal today suggests that Gold is going to rally back up to key resistance in the 1360s, but there remains the risk of a lower low, perhaps as far as 1200 or slightly below, before doing so. On a more positive note, this means that Gold is unlikely to go any lower than that if we get there, but could go much higher.
Looking ahead to the Fall, there is the increasing risk of a stock market crash, which the Bullion Banks could use to force Gold lower again, just as they did in 2008. For more information on this, I recommend you listen to my interview with Craig Hemke for Sprott Money last week:
Long-term—which starts when the Fed signals it is pausing its interest rate hikes and balance sheet reduction policies and reverting back towards QE and ZIRP, perhaps later this year—Gold is going to new highs in my humble opinion.